Problem 1-18A Cost Behavior; High-Low Method; Contribution Format Income Statement [LO3, LO4, LO5]
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Frankel Ltd., a British merchandising company, is the exclusive distributor of a product that is gaining rapid market acceptance. The company's revenues and expenses (in British pounds) for the last three months are given below:
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Frankel Ltd.
Comparative Income Statements
For the Three Months Ended June 30 |
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April |
May |
June |
| Sales in units |
1,700 |
3,400 |
5,100 |
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| Sales revenue |
£ 299,200 |
£ 598,400 |
£ 897,600 |
| Cost of goods sold |
117,300 |
234,600 |
351,900 |
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| Gross margin |
181,900 |
363,800 |
545,700 |
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| Selling and administrative expenses: |
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| Shipping expense |
42,300 |
64,400 |
86,500 |
| Advertising expense |
69,900 |
69,900 |
69,900 |
| Salaries and commissions |
104,900 |
174,600 |
244,300 |
| Insurance expense |
8,700 |
8,700 |
8,700 |
| Depreciation expense |
41,900 |
41,900 |
41,900 |
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| Total selling and administrative expenses |
267,700 |
359,500 |
451,300 |
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| Net operating income (loss) |
£ (85,800)
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£ 4,300 |
£ 94,400 |
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(Note: Frankel Ltd.'s income statement has been recast in the functional format common in the United States. The British currency is the pound, denoted by £.)
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| Required: |
| 1. |
Identify each of the company's expenses (including cost of goods sold) as either variable, fixed, or mixed.
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| Expenses |
Classification |
| Cost of goods sold |
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| Shipping expense |
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| Advertising expense |
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| Salaries and commissions |
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| Insurance expense |
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| Depreciation expense |
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| 2. |
Using the high-low method, separate each mixed expense into variable and fixed elements. State the cost formula for each mixed expense. (Enter mixed expenses in the order of company expenses provided under question.)
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| 3. |
Redo the company's income statement at the 5,100-unit level of activity using the contribution format. (Input all amounts as positive values except losses which should be indicated by a minus sign.)
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